BMF publishes guidance on minimum tax rules in context of changes in ownership and reorganizations

In recently published guidance, the tax authorities have reacted to the Federal Tax Court’s (BFH) decision in which the court expressed doubts as to whether the application of the minimum tax rule was in compliance with the German Constitution. (see Deloitte Tax-News).

Under the minimum tax rules, loss carryforwards may be set off against current year income up to 1 million Euro without restriction, but amounts exceeding 1 million Euro may be offset only to the extent of 60 % of the excess over 1 million Euro. Even though losses can be carried forward indefinitely, loss carryforwards may be forfeited under the change-in-ownership rule and certain rules on reorganizations. In its analysis of whether the minimum tax rules were compatible with the German Constitution, the BFH concluded that the rules may have to be interpreted restrictively in situations where the use of the losses by way of a loss carryforward was impossible for “factual or legal reasons” (such as a change-in-ownership or in a restructuring, where loss carryforwards are forfeited). The BFH, therefore, had doubts as to whether the application of the minimum tax rule was in compliance with the Constitution in these cases.

According to the new guidance, the tax authorities will grant a suspension of the execution to taxpayers in certain cases where the minimum tax rules, together with the change-in-ownership rule (or rules on the tax treatment of losses reorganizations), will lead to a final elimination of the tax losses carried forward.

In their guidance, the tax authorities specifically mention the following situations relevant for corporate taxpayers:

• An elimination of tax losses under the change-in-ownership rules in the years 2008 and 2009 (i.e. before the built-in gains exception was introduced); 
• An elimination of tax losses in a merger transaction; and 
• An elimination of a tax loss carryforward upon a liquidation of a corporation.

An execution will be granted only for fiscal years before the harmful transaction took place, i.e. in the case of a share transfer on 1 January 2009, the execution of tax assessments for the years until FY 2008 may be suspended. In the case of a share transfer on 30 September 2009, the same concept applies, i.e. only executions of assessments for fiscal years until FY 2008 may be suspended.

The granting of the suspension of the execution will be subject to the general conditions as applied by the tax authorities, mainly that the tax must not be at risk.

Taxpayers that have forfeited tax losses under the change-in-ownership or reorganization rules should review their previous tax assessments. If the minimum tax rule was applied in the past, therefore restricting the utilization of losses, the taxpayers should consider keeping the assessment open by filing an objection. Taxpayers also should carefully review whether an application should be made for a suspension of execution.

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